Higher Interest Rates Spur Demand For Australian Dollar

There are exporters who will hit by local dollar strength. But the thing that made the dollar strong—higher yields on the currency—probably outweigh the negative effect the stronger currency has on earnings and valuations. We say this casually, without any empirical evidence. But we can say it even more simply: high interest rates in Australia mean demand for the Aussie dollar will continue. That money has to go somewhere. A rising share market is probably a good place, as long as valuations are not absurd, which they are not.

So if you can dismiss the strong dollar as a risk to the stock market, well then how high could the stock market go? If you happened to look at a stock market chart from last year, you’d see it looks a lot like a stock market chart from this year. Stocks were zooming up. Gold and oil were up. Everything was up.

And then in the second week of May gold and oil fell and local shares took the next six months off, effectively going nowhere. Couldn’t the same thing happen this year? Especially if gold fails to make a new high and high base metals price curb demand. You begin to wonder how much higher resource prices can go.

Yet last year’s six month winter hiatus seems to be the exception over the last four years, at least for the ASX/200. In each of the previous years, the market’s advance was pretty well uninterrupted. The difference last year was three quarter point interest rate hikes by the RBA. Those hikes caused enough uncertainty—coupled with the consolidation in commodity prices—to give share prices a rest in the middle of this year.

Dan Denning
Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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